10-Q 1 file001.txt FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended September 30, 2006. Commission File Number: 0-19409 SYNERGY BRANDS, INC. (Exact name of registrant as it appears in its charter) Delaware 22-2993066 (State of incorporation) (I.R.S. Employer identification no.) 223 Underhill Blvd. Syosset NY 11791 (Address of principal executive offices) 516-714-8200 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] YES [ ] NO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ x ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [ x ] NO APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. N/A [ ] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On November 1, 2006 there were 5,299,940 shares outstanding of the registrant's common stock. SYNERGY BRANDS, INC. FORM 10-Q SEPTEMBER 30, 2006 TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page Item 1: Financial Statements Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005 2 - 3 Consolidated Statements of Operations for the nine months ended September 30, 2006 and 2005 (Unaudited) 4 Consolidated Statements of Operations for the three months ended September 30, 2006 and 2005 (Unaudited) 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (Unaudited) 6-7 Notes to Consolidated Financial Statements (Unaudited) 8-14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 15-31 Item 4: Control and Procedures 32 PART II: OTHER INFORMATION Item 1A: Risk Factors 33-46 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 47 Item 6: Exhibits and Reports on Form 8-K 47 SIGNATURES AND CERTIFICATIONS
1 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
ASSETS September 30, 2006 DECEMBER 31, 2005 (Unaudited) Current Assets: Cash and cash equivalents $2,001,328 $263,554 Accounts receivable trade, less allowance for doubtful accounts of $127,481 for both periods 10,586,073 7,494,324 Other receivables 2,316,328 1,848,369 Note Receivable - current 296,722 287,967 Inventory 2,412,247 1,909,315 Prepaid assets and other current assets 422,977 398,426 ----------- ---------- Total Current Assets 18,035,675 12,201,955 Property and Equipment, Net 307,183 356,014 Other Assets 899,816 802,887 Notes Receivable 2,340,984 2,691,439 Intangible Assets, net of accumulated amortization of $2,622,743 and $2,518,946 682,249 786,046 Goodwill 514,297 514,297 ----------- ---------- Total Assets $22,780,204 $17,352,638 =========== ==========
The accompanying notes are an integral part of this statement. 2 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, 2006 December 31 (Unaudited) 2005 Current Liabilities: Line-of-Credit $5,929,341 $4,033,242 Notes Payable - Current 3,994,883 1,645,531 Accounts Payable and Accrued Expenses 3,508,664 1,883,591 Related Party Note Payable 24,698 61,882 Deferred income 338,808 127,000 ----------- ----------- Total Current Liabilities 13,796,394 7,751,246 Notes Payable 2,067,007 2,668,691 Stockholders' Equity: Class A Preferred stock - $.001 par value; 100,000 shares authorized and outstanding; liquidation preference of $10.50 per share 100 100 Class B preferred stock - $.001 par value; 150,000 shares authorized, none issued - - Class B, Series A Preferred stock - $.001 par value; 500,000 shares authorized; 330,000 issued and outstanding; liquidation preference of $10.00 per share 330 330 Class B Series B preferred stock - $.001 par value, 250,000 shares authorized, 80,000 shares issued and outstanding; liquidation preference of $10.00 per share 80 80 Common stock - $.001 par value;14,000,000 shares authorized; 5,299,940 and 4,457,530 shares issued 5,300 4,458 Additional paid-in capital 46,885,397 45,918,817 Deficit (39,961,064) (38,910,484) Unearned compensation - (67,260) Accumulated other comprehensive loss (8,340) (8,340) Less treasury stock, at cost, 1,000 shares (5,000) (5,000) ----------- ----------- Total stockholders' equity 6,916,803 6,932,701 ----------- ----------- Total Liabilities and Stockholders' Equity $ 22,780,204 $ 17,352,638 =========== ===========
The accompanying notes are an integral part of this statement. 3 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
2006 2005 Net Sales $ 50,389,202 $ 47,947,473 ------------- -------------- Cost of Sales Cost of product 45,888,585 44,039,294 Shipping and handling costs 836,595 750,439 ------------- -------------- 46,725,180 44,789,733 ------------- -------------- Gross Profit 3,664,022 3,157,740 ------------- -------------- Operating expenses Selling, general and Administrative Expenses 3,311,653 2,863,156 Depreciation and amortization 275,549 370,971 3,587,202 3,234,127 ------------- -------------- Operating Profit (loss) 76,820 (76,387) ------------- -------------- Other Income (expense) Interest Income 113,023 63,761 Other Income (expense) (10,812) (11,873) Equity in earnings of investee 176,146 108,306 Interest and financing expense (1,360,795) (1,141,850) ------------- -------------- (1,082,438) (981,656) ------------- -------------- Loss before income taxes (1,005,618) (1,058,043) Income tax expense 44,962 84,163 ------------- -------------- NET LOSS (1,050,580) (1,142,206) Dividend-Preferred Stock (266,250) (227,083) ------------- -------------- Net loss attributable to Common Stockholders $ (1,316,830) $ (1,369,289) ============= ============== Basic and diluted net loss per common share: $ (0.27) $ (0.38) ============= ==============
The accompanying notes are an integral part of this statement. 4 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
2006 2005 Net Sales $ 18,838,342 $ 17,122,629 ------------- ------------- Cost of Sales Cost of product 17,253,796 15,700,492 Shipping and handling costs 302,791 252,171 ------------- ------------- 17,556,587 15,952,663 Gross Profit 1,281,755 1,169,966 ------------- ------------- Operating expenses Selling, general and Administrative Expenses 1,132,045 1,019,493 Depreciation and amortization 68,743 123,549 ------------- ------------- 1,200,788 1,143,042 ------------- ------------- Operating Profit 80,967 26,924 ------------- ------------- Other Income (expense) Interest Income 37,622 20,469 Other Income (expense) (4,869) (4,636) Equity in earnings of investee 71,730 49,875 Interest and financing expense (534,886) (395,438) ------------- ------------- (430,403) (329,730) ------------- ------------- Loss before income taxes (349,436) (302,806) Income tax expense 6,794 14,883 NET LOSS (356,230) (317,689) Dividend-Preferred Stock (85,750) (78,583) ------------- ------------- Net loss attributable to Common Stockholders $ (441,980) $ (396,272) ============= ============= Basic and diluted net loss per common share: $ (0.08) $ (0.09) ============= =============
The accompanying notes are an integral part of this statement. 5 SYNERGY BRANDS, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMEBER 30, (UNAUDITED)
2006 2005 -------------- -------------- Cash Flows From Operating Activities: Net loss $(1,050,580) $ (1,142,206) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and Amortization 275,549 370,971 Amortization of financing cost 30,109 45,958 Equity in earnings of investee (176,146) (108,306) Operating expenses paid with common stock 148,156 37,525 Changes in Operating Assets and Liabilities: Net (increase) decrease in: Accounts receivable and other receivables (3,599,708) 92,732 Inventory (502,932) (1,185,098) Prepaid assets, related party note receivable and other assets 235,589 (25,530) Net increase (decrease) in: Accounts payable, related party note payable, accrued expenses and other current liabilities 1,759,432 (2,154,421) Deferred Income 195,265 - -------------- -------------- Net cash used in operating activities (2,645,266) (4,068,375) -------------- -------------- Cash Flows From Investing Activities: Purchase of fixed assets (11,912) (108,333) Payments received on notes receivable 367,695 211,867 Issuance of notes receivable (25,995) (12,100) Payment of security deposit - (20,000) Investee dividend received 28,800 28,800 -------------- -------------- Net cash provided by investing activities 358,588 100,234 -------------- -------------- Cash Flows From Financing Activities: Borrowings under line of credit 30,557,213 30,462,920 Repayments under line of credit (28,537,414) (29,455,496) Proceeds from the issuance of notes payable 4,538,819 2,535,531 Repayments of notes payable (2,424,290) (173,333) Net proceeds from private placement - 770,000 Consulting Service (45,000) (46,436) Payment of dividends (226,250) (227,083) Payment of financing costs (67,750) (65,411) Proceeds from issuance of common stock 269,124 54,345 -------------- -------------- Net cash provided by financing activities 4,024,452 3,855,037 -------------- -------------- Net increase (decrease) in cash 1,737,774 (113,104) Cash and cash equivalents, beginning of period 263,554 945,806 -------------- -------------- Cash and cash equivalents, end of period $ 2,001,328 $ 832,702 ============== ==============
The accompanying notes are an integral part of this statement. 6 SYNERGY BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
2006 2005 ------------- ------------ Supplemental disclosure of cash flow information: Cash paid for interest $ 862,910 $ 720,826 ============= ============ Cash paid for income taxes $ 44,962 $ 84,163 ============= ============ Supplement disclosures of non-cash operating, investing and financing activities: Common Stock issued with debt financing $ - $ 63,500 ============= ============ Common Stock issued with debt conversions $ 223,700 $1,533,854 ============= ============ Common Stock issued for services $ 148,156 $ 37,525 ============= ============ Common Stock issued to satisfy liabilities $ 155,000 $ 45,000 ============= ============
The accompanying notes are an integral part of this statement. 7 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements SEPTEMBER 30, 2006 and 2005 NOTE A - UNAUDITED FINANCIAL STATEMENTS The consolidated balance sheet as of September 30, 2006, the consolidated statements of operations for the nine months ended September 30, 2006 and 2005, the consolidated statement of operations for the three months ended September 30, 2006 and 2005 and the condensed consolidated statements of cash flows for nine months ended September 30, 2006 and 2005, have been prepared by Synergy Brands, Inc. ("Synergy" or the "Company") without audit. The balance sheet at December 31, 2005 has been derived from the audited financial statements as of that date. In the opinion of management, all adjustments (which include only normally recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2006 (and for all other periods presented) have been made. Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2005 filed by the Company. The results of operations for the periods ended September 30, 2006 and 2005 are not necessarily indicative of the operating results for the respective full years. NOTE B - STOCK-BASED COMPENSATION Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments to be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. NOTE C- ADVERTISING EXPENSE The Company expenses advertising and promotional costs as incurred. Advertising and promotional costs were approximately $110,000 and $54,000 for the nine months ended September 30, 2006 and 2005, respectively. 8 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements SEPTEMBER 30, 2006 and 2005 NOTE D - VENDOR ALLOWANCES The Company accounts for vendor allowances under the provisions of EITF No. 02-16 "Accounting by a Customer (including a reseller) for Certain Consideration Received from a Vendor". The Company recognizes vendor allowances at the date goods are purchased and recorded under fixed and determined arrangements. The Company receives allowances and credits from suppliers for volume incentives, promotional allowances and, to a lesser extent, new product introductions, which are typically based on contractual arrangements covering a period of one year or less. Volume incentives and promotional allowances earned based on quantities purchased and new product allowances are recognized as a reduction to the cost of purchased inventory and recognized when the related inventory is sold. Promotional allowances that are based on the sell-through of products are recognized as a reduction of cost of sales when the products are sold for which the promotional allowances are given. For the nine months ended September 30, 2006, the Company recognized approximately $1,374,221 in vendor allowances arising from arrangements with a major supplier that met the criteria for being fixed and determinable. Vendor allowances from a manufacturer, included in other receivables in the accompanying consolidated balance sheet aggregated $2,212,765 and $1,730,806 at September 30, 2006 and December 31, 2005. NOTE E - INVENTORY Inventory, consisting of goods held for sale, as of September 30, 2006 consisted of the following: Grocery, health and beauty products $1,927,021 General Merchandise 485,226 ---------- 42,412,247 ========== NOTE F - NOTE RECEIVABLE In December 2004, the Company sold accounts receivable for $2,200,000. This promissory note, which is secured by the accounts receivable, requires monthly payments of principal and interest at 4% for seven years, beginning in January 2005. As a condition for the sale, the Company issued 150,000 shares of common stock to the note holder. The value of the shares ($200,000) was treated as a reduction of the sales price. The Company does not anticipate selling selected products to this customer base in the future. The balance of the note receivable at September 30, 2006 was $ 1,708,413. In October, 2005 SYBR.com Inc., a wholly owned subsidiary of the Company, invested $1 million in a Private Placement of Senior Subordinated Debentures issued by ITT. The investment consists of a five year 8% Note (ITT Note), and 200,000 warrants exercisable into 200,000 common shares of ITT stock at $5.00 per share (ITT Warrants). The Company financed this investment with a $1 million fully recourse note with a major Shareholder under the same terms and conditions as the ITT Note and assigned to such shareholder the ITT Warrants. As consideration for the financing, the Company has retained the benefit to be derived from 100,000 of the warrants received from ITT. In relation to the ITT warrants, Company has recorded deferred income of $127,000. On September 29, 2006, $142,857 was paid by ITT to reduce the loan balance. As of September 30, 2006 the outstanding loan balance was $857,143. As part of the Company's agreement, the Company paid $142,857 on the note payable. The outstanding balance of the note payable at September 30, 2006 was $857,143. 9 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements SEPTEMBER 30, 2006 and 2005 NOTE G - INVESTMENT The Company holds a 22.0% interest in an investee ("Interline Travel and Tours or ITT"). The Company accounts for this investment under the equity method. The Company recorded equity in the net earnings of investee of $176,146 and $108,306 during the nine months ended September 30, 2006 and September 30, 2005, respectively. At September 30, 2006, the investment in ITT is $511,685 as included in "Other Assets" on the accompanying balance sheet. Summarized results of operations of this investee for the nine months ended September 30, 2006 and 2005 is as follows: 2006 2005 ------------- ------------- Revenues $24,949,000 $ 10,041,000 Total expenses (23,826,000) (9,349,000) Other income 195,000 168,000 Income before income taxes 1,318,000 860,000 Income tax expense (487,000) (292,000) ------------- ------------- Net income $ 831,000 $ 568,000 ============= ============= NOTE H - LINE-OF-CREDIT AND NOTES PAYABLE In 2002, two of the Company's subsidiaries entered into two revolving loan and security agreements with the same financial institution (the "Lender"). The lines of credit, as amended in July 2006, allow for the borrowing of up to $6,000,000 based on the sum of 85% of the net face amount of eligible accounts receivable, as defined, plus the lesser of (1) $2,750,000 or (2) eligible inventory and eligible goods in transit, as defined. Approximately $5,930,000 was outstanding under the agreements at September 30, 2006. As amended, the agreement extends through December 31, 2006. The Company is seeking to refinance its secured financing needs through other Asset Based Lenders. There is no assurance that the Company will be successful and it may need to continue to incur high financing costs. Interest accrues on outstanding borrowings at the greater of (i) 5% per annum in excess of the prime rate or (ii) 10.50% per annum. At September 30, 2006, the interest rate on outstanding borrowings was 13.25%. Outstanding borrowings are collateralized by a continuing security interest in all of the subsidiaries' accounts receivable, chattel paper, inventory, equipment, instruments, investment property, documents and general intangibles. In addition, 400,000 shares of the Company's common stock remain as collateral on the outstanding borrowings. During the nine months of 2006, the Lender converted $123,700 of outstanding debt into 91,200 shares of common stock. In 2005 the Lender converted $1,003,000 of outstanding debt into 427,532 shares of common stock. 10 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements SEPTEMBER 30, 2006 and 2005 NOTE H Continued In 2004, the Company received $490,000 pursuant to the issuance of secured promissory notes from certain shareholders of ITT (see Note G). On April 2, 2004 the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $1.5 million secured convertible debenture that converts into common stock under certain conditions at $1.75 per share as amended, and matures on April 2, 2007. The debenture provides for monthly payments of $50,000, plus interest commencing October 1, 2004. In addition, Laurus was issued 100,000 warrants exercisable at $3.00 per share. The debenture has a three-year term with a coupon rate of prime plus 3%. The Company has filed an S-3 registration statement which has been granted effectiveness to register the common stock underlying the debenture and warrant. In 2004, the Company converted $500,000 of this outstanding debt into 100,000 shares of common stock. In March 2005, the Company converted $525,000 of this outstanding debt into 150,000 shares of common stock. The Company repaid $125,000 of this debt at September 30, 2006. At September 30, 2006 the outstanding balance was $350,000. In 2005, the Company received $600,000 pursuant to the issuance of secured promissory notes from certain shareholders of ITT (see Note G). On January 25, 2005, the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $500,000 secured convertible debenture that converts into common stock under certain conditions at $1.75 per share as amended, and matures on January 25, 2008. The financing provides Laurus with registration rights for common shares it is issued under conversion. The debenture provides for monthly payments of $16,666.67 plus interest, commencing August 1, 2005. The Company repaid $250,000 of this debt at September 30, 2006. In addition, Laurus was issued 33,333 warrants exercisable at $ 3.50 per share. The debenture has a three-year term with a coupon rate of prime plus 3%. The conversion prices on the Laurus debentures were always above the current stock price at the closing date. At September 30, 2006, the outstanding balance was $250,000. In January 2005, the Company entered into a promissory note with a major regional bank for $1,000,000. Borrowing under the note bears interest at prime (8.25% at September 30, 2006). The Company is not required to repay any principal until the maturity date of the note, September 1, 2007. As security for the note, a pledge agreement was entered by certain Shareholders of ITT. Borrowings at September 30, 2006 were $900,000. On August 1, 2006, the Company secured $900,000 from two Shareholders of short term financing that matures on October 31, 2006. The advance may be extended by mutual consent. On June 21, 2005, the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $500,000 secured convertible debenture that converts into common stock under certain conditions at $1.75 per share as amended, and matures on June 21, 2008. The financing provides Laurus with registration rights for common shares it is issued under conversion. The debenture provides for monthly payments of $16,666.67 plus interest, commencing December 1, 2005. The Company repaid $183,333 of this debt at September 30, 2006. In addition, Laurus was issued 33,333 warrants exercisable at $ 3.50 per share. The Company's common stock quoted market price at the date of closing was $2.15 per share. The debenture has a three-year term with a coupon rate of prime plus 3%. At June 30, 2005 the Company recorded a charge of $18,000 as prepaid expense for the fair value of the warrants, and this amount is being amortized over the life of the note. At September 30, 2006, the outstanding balance was $316,667. In July 2006 the conversion price of an aggregate of $100,000 of the Laurus debt of January 2005 and June 2005 was reduced from $1.75 to $1.00. The underlying debt was converted in July 2006. On March 14, 2006 the Company closed a $1.75 million junior secured five year loan with an existing lender bearing a fixed interest rate of 10%. Payments will be made at a rate of $32,000 per month starting October 1, 2006. The lender was issued a warrant to acquire 270,000 shares of the Company's common stock valued at $362,000. The relative fair value of the warrant of $362,000 is being charged to operations as additional interest over the term of the loan. 11 NOTE I - STOCKHOLDERS' EQUITY During the nine months ended September 30, 2006, the Company converted $123,700 of debt of IIG into 91,200 shares of common stock (see Note H). In July 2006, Laurus Master Funds converted $100,000 of debt into 100,000 shares of common stock (see Note H). During the nine months ended September 30, 2006, the Company issued 134,410 shares of common stock as compensation for services under existing agreements and recorded a charge to operations of $ 148,156. In March 2006, the Company issued 30,000 shares of common stock to Class B Series A Preferred Stockholders in compliance with the subscription agreements dated February 26, 2003. In July 2006, the Company issued 50,000 shares of common stock to Class B Series A Preferred Stockholders in compliance with the subscription agreements dated July 2, 2003. During the nine months ended September 30, 2006, the Company issued 544,300 shares of common stock in connection with the sale of securities and the satisfaction of certain obligations which included 130,000 shares to satisfy certain liabilities (see Note F). Effective January 2006, the Company cancelled options to acquire 300,000 shares of common stock held by employees. There are no options outstanding with employees at September 30, 2006. 12 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements SEPTEMBER 30, 2006 and 2005 NOTE J - SEGMENT AND GEOGRAPHICAL INFORMATION All of the Company's identifiable assets and results of operations are located in the United States and Canada. Management evaluates the various segments of the Company based on the types of products being distributed which were, as shown below: Nine Months Ended September 30, 2006 and 2005
Proset PHS Group B2C Corporate Total Revenue from external 2006 $ 1,223,561 $ 47,720,070 $ 1,445,571 $ - $ 50,389,202 customers 2005 $ 985,102 $ 45,523,173 $ 1,439,198 $ - $ 47,947,473 Net Income (loss) attributable 2006 $ (167,239) $ 638,005 $ (222,716) $ (1,564,880) $ (1,316,830) to common Stockholders 2005 $ (372,743) $ 168,651 $ (301,148) $ (864,049) $ (1,369,289) Interest & Finance 2006 $ 62,716 $ 871,995 $ - $ 426,084 $ 1,360,795 Expenses 2005 $ 51,981 $ 951,384 $ - $ 138,485 $ 1,141,850 Depreciation & 2006 $ 74,628 $ 8,902 $ 117,342 $ 74,677 $ 275,549 amortization 2005 $ 137,565 $ 8,802 $ 115,656 108,948 $ 370,971 Identifiable assets are as follows: September 30, 2006 $ 1,496,648 $ 15,836,444 $ 1,665,002 $ 3,782,110 $ 22,780,204 December 31, 2005 $ 1,392,551 $ 10,056,544 $ 1,715,940 $ 4,187,603 $ 17,352,638
Three Months Ended September 30, 2006 and 2005
Proset PHS Group B2C Corporate Total Revenue from external 2006 $ 230,535 $ 18,079,537 $ 528,270 $ - $18,838,342 customers 2005 $ 258,195 $ 16,342,845 $ 521,589 $ - $17,122,629 Net Income (loss) attributable 2006 $ (108,306) $ 266,278 $ (52,092) $ (547,860) $ (441,980) to common Stockholders 2005 $ (141,029) $ 159,651 $ (97,268) $ (317,626) $ (396,272) Interest & Finance 2006 $ 17,639 $ 324,438 $ - $ 192,809 $ 534,886 Expense 2005 $ 18,597 $ 314,324 $ - $ 62,517 $ 395,438 Depreciation & 2006 $ 24,876 $ 2,730 $ 39,114 $ 2,023 $ 68,743 amortization 2005 $ 45,855 $ 2,934 $ 38,444 $ 36,316 $ 123,549
13 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements SEPTEMBER 30, 2006 and 2005 NOTE K - NET LOSS PER SHARE Basic and diluted loss per share is calculated by dividing the net loss applicable to common stock by the weighted-average number of common shares outstanding during each period. Incremental shares from assumed exercises of stock options, warrants and convertible debt and equity securities of 1,391,725 and 1,351,738 for the nine months ended September 30, 2006 and 2005, respectively, have been excluded from the calculation of diluted loss per share since their effect would be antidilutive. Nine Months ended September 30, 2006 2005 ------------ ------------- Net loss applicable to common stock $ (1,316,830) $ (1,369,289) ============ ============= Weighted-average number of shares in basic 4,825,426 3,633,443 and diluted EPS ============ ============= Three Months ended June 30, 2006 2005 ------------ ------------- Net loss applicable to common stock $ (441,980) $ (396,272) ============ ============= Weighted-average number of shares in basic 5,134,348 3,988,018 and diluted EPS ============ ============= NOTE L - RECENT ACCOUNTING PRONOUNCEMENTS In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - An Amendment of FASB No. 133 and 140. The purpose of SFAS statement No. 155 is to simplify the accounting for certain hybrid financial instruments by permitting fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of any entity's first fiscal year beginning after September 15, 2006. We believe that the adoption of this standard on January 1, 2007 will not have a material effect on our consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy as defined in the standard. Additionally, companies are required to provide enhanced disclosure regarding financial instruments in one of the categories (level 3), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We believe that the adoption of SFAS No. 157 will not have a material impact on our consolidated financial statements. In July 2006, the FASB issued FASB Interpretation 48, "Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides a guidance on derecognition, classification interest and penalties, accounting in interim periods, disclosure and transition. We are currently evaluating the impact this interpretation will have on our consolidated financial statements. For our Company, this interpretation will be effective beginning January 1, 2007. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Synergy Brands, Inc. (SYBR or the Company) is a holding company that operates in the wholesale and online distribution of Groceries and Health & Beauty Aid (HBA) as well as wholesale, retail and online distribution of premium cigars and salon & luxury products through three business segments. It principally focuses on the sale of nationally known brand name grocery and HBA consumer products manufactured by major U.S. manufacturers. The company uses supply based logistics to optimize its distribution costs on both wholesale and retail levels. The Company also owns 22% of the outstanding common stock of Interline Travel and Tours, Inc. (AKA: PERX). PERX provides cruise and resort hotel packages through a proprietary reservation system to airline employees and their retirees. PERX is believed to be the largest Company in this sector of the travel industry. Information on PERX can be found at www.perx.com. The Company believes that its capital investment in this unique travel Company could provide for material future capital appreciation. Synergy Brands does not manage PERX's day-to day operations. SYBR and PERX have been exploring several opportunities to optimize the shareholder value of both Companies. Business-to-Business (B2B): The Company operates two businesses segments within the B2B sector. B2B is defined as sales to non-retail customers. PHS Group ("PHS") distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States and Canada. PHS is the largest subsidiary of the Company and represents about 95% of the overall Company sales. PHS's core sales base continues to be the distribution of nationally branded consumer products in the grocery and (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, whereby a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply and in turn increase sales to its customers through this unique focus. PHS concentrates on the fastest moving promotional items such as: Tide, Bounty, Nyquil, Pantene, Clorox bleach, Scott tissues, Marcal tissues among many others, and uses logistics and distribution savings to streamline and reduce its sale prices. The second business segment within the Company's B2B sector is Proset. Proset imports and distributes Salon Hair care products and luxury goods to wholesalers and distributors, in the Northeastern part of the United States. Business to Consumer (B2C): The Company operates three businesses within the B2C segment. B2C is defined as sales to retail customers. The Company's B2C activities are conducted through its wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses o Cigars Around the World sells premium cigars to restaurants, hotels, casinos, country clubs and many other leisure related destinations. The company was acquired in June 2003. (www.cigarsaroundtheworld.com) o CigarGold.com sells premium cigars through the Internet directly to the consumer. (www.cigargold.com) o GRC opened its first retail store in Miami, Florida in March, 2006. The store is expected to be an extension to CAW operation and the store is called Cigars Around the World. o BeautyBuys.com sells salon hair care products directly to the consumer via the Internet. (www.beautybuys.com) o The Company's B2C websites also expect to generate revenue through affiliates and partnership agreements such as www.overstock.com, www.google.com and paid links. 15 CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2005.
OPERATING % OPERATING AND % SEGMENTS Change CORPORATE SEGMENTS Change NINE MONTHS ENDED 9/30/06 Revenue $50,389,202 5.09% $ 50,389,202 5.09% Gross Profit 3,664,022 16.03% 3,664,022 16.03% SG&A (excluding depreciation and amortization) 2,268,257 -4.38% 3,311,653 15.66% Operating Profit 1,194,893 128.25% 76,820 200.57% Net profit (loss) attributable to common stockholders 248,050 149.10% (1,316,830) -3.83% Net profit (loss) per common share 0.05 (0.27) Interest and financing expenses 934,711 -6.84% 1,360,795 19.17% NINE MONTHS ENDED 9/30/05 Revenue $47,947,473 $ 47,947,473 Gross Profit 3,157,740 3,157,740 SG&A (excluding depreciation and amortization) 2,372,215 2,863,156 Operating Profit (loss) 523,502 (76,387) Net loss attributable to common stockholders (505,240) (1,369,289) Net loss per common share (0.13) (0.38) Interest and financing expenses 1,003,365 1,141,850
Synergy Brands Synergy Brands is a holding Company that operates through wholly owned segments. In order to fully understand the results of operations, each segment is analyzed respectively. Revenues increased by 5% to $50,389,202 for the nine months ended September 30, 2006, as compared to $47,947,473 for the nine months ended September 30, 2005. The increase in sales was predominately from the sale of PHS private label products and an increase in the Company's PHS wholesale distribution operations. The Company has been able to diversity its products selection both in national brand and private label to achieve better operating margins. Even though the Company was able to grow revenue by only 5%, gross profit increased by 16% and the Company attained an operating profit of $76,820 at September 30,2006 as compared to a $76,387 operating loss at September 30, 2005. Selling General and Administrative expenses (SGA) increased by 16% to $3,311,653 for the nine months ended September 30, 2006 as compared to $2,863,156 for the nine months ended September 30, 2005. The increase of SG&A was marginal as compared to increased sales as well as an increase in corporate regulatory costs on a corporate level. SG&A expense for PHS Group remained flat at $1,549,490 for the nine months ended September 30, 2006 as compared to $1,546,787 for the nine months ended September 30, 2005. PHS incurs variable expenses in connection with selling costs such as sales commission, drivers, warehousing and administrative personnel as well as its promotional expenses. As revenues rise sales commissions and certain operating expenses resulting from sales increase commensurately. 16 The net loss attributable to Common Stockholders of the Company was $1,316,830 for the nine months ended September 30, 2006 as compared to $1,369,289 for the nine months ended September 30, 2005. Interest and financing costs represents 103% of the total loss. Management believes that its corporate expenses may increase as a result of additional regulatory requirements that have been enacted by the Securities and Exchange Commission (SEC). The Company will be required to comply with additional governance and financial regulations that will likely result in additional corporate expenses. The Company allocated certain employees to regulatory corporate functions in FY 2006 that were not allocated in FY 2005. Corporate expenses for the nine months ended September 30, 2006 totaled $1,043,396, which include legal, accounting, corporate employees, and regulatory expenses as compared to $490,941 for the nine months ended September 30, 2005. Below is a summary of the results of operation by segment: PHS Group: (B2B Operations) Synergy's Grocery operation improved its operation through an expansion of its Metro NY wholesale operation and private label distribution to national chains. Sales improved by 5% to $47.7 million and operating profit increased by 33% to $1,514,199 for the nine month period ended September 30, 2006 as compared to such same period ended September 30, 2005. PHS represented 95% of the Company's overall revenues and provides the most of the cash flow for the Company's other segments as well as corporate regulatory expenses. PHS plans to continue attempting to build its Metro NY, operations and increase private label sales and add to its international sales to Canada and the Caribbean. B2C operations. (Gran Reserve Corporation supra GRC) B2C operations consist of www.CigarGold.com, www.CigarsAroundtheWorld.com, www.BeautyBuys.com; retail store operation in Miami and online partnership programs such as www.Overstock.com and www.Google.com. The operation has relocated to a 6,000 square foot facility in Miami Lakes, Florida, which handles administration, and order flow for the operation. Sales remained flat at $1,445,571 while operating loss decreased by 26% to $216,727. Retail store operations commenced in December of 2005 with a grand opening, which occurred on March 4, 2006. GRC plans to have its retail outlets act as its hubs for expansion in FY 2006-2007. The combination of online sales as well as retail store sales is expected to be the focus for growth in FY 2006-2007. The retail store is an expansion of Bill Rancic's Cigars Around the World (CAW) concept of providing the ultimate destination to a cigar aficionado. The Company has been disappointed by GRC's growth and believes that rapidly changing antismoking legislation may shift the Cigar business to be a complete destination business as opposed to a leisurely activity. Proset operations In the first quarter of 2006, the Company secured direct contacts in Europe for Luxury Goods and secured Costco and other customers for the distribution of these goods. These goods include some of the most respected producers for Bags, wallets, briefcases, and eyewear in Europe. Management expects that Proset-operating results should significantly improve in FY 2006-2007. However, results have been disappointing and below managements expectations. However, Proset-operating structure has been integrated into PHS Group, thus allowing for logistics to be integrated into PHS operations. The flow of luxury goods has materialized in the first quarter of 2006 and Costco and Amazon have received numerous deliveries. However, repeat cycles and product acceptance has been below management's expectations. 17 Corporate Expenses: The Company's allocation to corporate expenses was increased by 113% to $1,043,396 for the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005. Corporate expenses represent 32% of overall operating expense of the Company. Operating expenses for all operations including corporate expenses totaled $3.3 million in the first nine months of 2006. The Company allocated certain employees to regulatory corporate functions in FY 2006 that were not allocated in FY2005. Corporate expenses reflected the charges needed to operate the public corporation, Synergy Brands Inc. These included all the regulatory costs, board fees, governance fees, legal and accounting expenses and employees that oversee the operations of the Company's assets. Below is a detailed review of the Company's performance. In order to fully understand the Company's results a discussion of the Company's segments and their respective results follow; B2B OPERATIONS The Company's B2B operations consist of two operating businesses, PHS Group and Proset. PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States and Canada. PHS is the largest subsidiary of the Company and represents about 95% of the overall company sales. PHS's core sales base remains the distribution of nationally branded consumer products in the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, where as a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply and in turn increase sales to its customers through this unique focus. PHS concentrates on the fastest moving promotional items and uses logistics and distribution savings to streamline and reduce its sale prices. The second business segment within the company's B2B sector is Proset Hair Systems (Proset). Proset imports and distributes salon hair care products and luxury goods to wholesalers and distributors, in the northeastern part of the United States. PHS has developed private label grocery products through co-packing arrangements that it has started to sell to major U.S. national chains. PHS is also developing co-packing arrangements in China to further support the growth of its private label business. Management expects to outsource all services that would be required for product development and manufacturing, but will utilize its logistic expertise for marketing, distribution and sales. 18 PHS SEGMENT INFORMATION OF OPERATING BUSINESSES PHS Group CHANGE NINE MONTHS ENDED 9/30/06 Revenue 47,720,070 4.83% Gross Profit 3,072,591 14.28% SG&A 1,549,490 0.17% Operating Profit (loss) 1,514,199 33.64% Net Profit(loss) 638,005 278.30% Interest and financing expenses 871,995 -8.34% NINE MONTHS ENDED 9/30/05 Revenue 45,523,173 Gross Profit 2,688,644 SG&A 1,546,787 Operating Profit (loss) 1,133,055 Net Profit(loss) 168,651 Interest and financing expenses 951,384 PHS increased its revenues by 5% to $47.7 million for nine months ended September 30, 2006 as compared to $45.5 million for the nine months ended September 30, 2005. The increase in PHS business is attributable to the utilization of additional vendors, development of a wholesale operation and expansion of the Canadian distribution business in Ontario, Canada, increase of its Domestic Wholesale business, increase of private label distribution and expansion into the Dominican Republic. PHS increased its gross profit by increasing Direct Store Delivery sales as well as focusing on promotional and co-packed merchandise offered by its vendors and partners. The overall gross profit percentage increased from 5.9% to 6.4%. PHS has been able to maintain its sales and customer base while increasing gross profit by 14%. This has been achieved through its wholesale operations by generating incremental retail sales as opposed to lower margin wholesale revenues. Additionally, PHS has taken advantage of promotional rebates, which further enables its cost of foods to be reduced. PHS plans to continue this approach, but it does rely on manufactures promotion to achieve its targeted results. Continuing the development of grocery products produced for the benefit of PHS customers is another objective currently being developed and executed by PHS. Net profit was $638,005 for the nine months ended September 30, 2006 as compared to a profit of $168,651 for the nine months ended September 30, 2005. 19 PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES Salon NINE MONTHS ENDED 9/30/06 products CHANGE Revenue 1,223,561 24.21% Gross Profit 153,242 374.29% SG&A 181,183 -14.54% Operating Profit(loss) (102,579) -67.67% Net loss (167,239) -55.13% Interest and financing expenses 62,716 20.65% NINE MONTHS ENDED SIX 9/30/05 Revenue 985,102 Gross Profit 32,310 SG&A 212,016 Operating Profit(loss) (317,271) Net Profit(loss) (372,743) Interest and financing expenses 51,981 Proset revenues increased by 24% to $1,223,561 for the nine months ended September 30, 2006 as compared to $985,102 the nine months ended September 30, 2005. SG&A decreased by 15% to $181,183 for the nine months ended September 30, 2006 as compared to $212,016 for the nine months ended September 30, 2005. Net loss improved from a loss of $372,743 for the nine months ended September 30, 2005, to a loss of $167,239 for the nine months ended September 30, 2006. The increase in revenue was in a large part due to an increase in sales of designer luxury goods, which were imported from Europe and sold to Costco. Proset started to distribute its newly acquired line of salon products from Italy under the NYCE logo at the end of the third quarter of 2006. The luxury goods market has thus far not achieved the financial expectation of Proset. Targeted complaints by major luxury goods manufactures relating to channels of distribution have shifted consumers from purchasing these goods from mass merchandising to the traditional channels of Department stores, manufacturers outlet and authorized retailers. 20 B2C SEGMENT INFORMATION OF OPERATING BUSINESSES B2C CHANGE NINE MONTHS ENDED 9/30/06 Revenue 1,445,571 0.44% Gross Profit 438,189 0.32% SG&A 537,574 -12.36% Operating Profit(loss) (216,727) -25.85% Net loss (222,716) -26.04% NINE MONTHS ENDED 9/30/05 Revenue 1,439,198 Gross Profit 436,786 SG&A 613,412 Operating Profit(loss) (292,282) Net Profit(loss) (301,148) The Company's B2C activities are conducted through its wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses o Cigars Around the World sells premium cigars to restaurants, hotels, casinos, country clubs and many other leisure related destinations. The company was acquired in June 2003. (www.cigarsaroundtheworld.com) o CigarGold.com sells premium cigars through the Internet directly to the consumer. (www.cigargold.com) o GRC opened its first retail store in Miami, Florida in March, 2006. The store is expected to be an extension to CAW operation and the store is called Cigars Around the World. o BeautyBuys.com sells salon hair care products directly to the consumer via the Internet. (www.beautybuys.com) o The Company's B2C websites also expects to generate revenue through affiliates and partnership agreements such as www.overstock.com, www.google.com and paid links. Cigars Around the World (CAW), a wholly owned subsidiary of Synergy Brands, Inc., officially opened its first retail outlet and cigar club in Miami Lakes, Florida, on March 4, 2006. The 6,000 square-foot facility, located at 15804 57th Ave, in Miami Lakes features more than 1,000 unique cigars that include brand name, hand made premium cigars as well as Gran Reserve Corp's (GRC) proprietary brands as well as Cigar Accessories. The entire facility is temperature and humidity controlled so all the Cigars can be viewed in a total store experience. In addition, the store houses a Cigar Lounge with Free satellite TV and Free Wireless Internet which will enhance the customer's Cigar smoking and shopping experience. CAW expects to use its facility for Radio remotes for special events, seminars on upcoming news in the Cigar world, and other organized events for its members. CAW features the top selling Cigar brands which include Macanudo, Partagas, Montecristo, Cohiba, Arturo Fuentes-Opus X, Hemingway, Padron, Punch, Romeo y' Julietta, Suarez Gran Reserve, Davidoff, Ashton, Mike Ditka and Breton labels among others. The store will also offer premium brands of upscale accessories. All the products in the store are available nationally on the Store's website www.CigarsAroundTheWorld.com. Revenues in the Company's B2C operation remained flat for the nine months ended September 30, 2006 at $1,445,571 as compared to $1,439,198 for the nine months ended September 30, 2005. CAW on a current operating basis represents approximately 59% of B2C revenues for the nine months ended September 30, 2006. Gross profit for the nine months ended September 30, 2006 remained flat at $438,189 as compared to $436,786 for the nine months ended September 30, 2005. 21 CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2005.
OPERATING % OPERATING AND % SEGMENTS Change CORPORATE SEGMENTS Change THREE MONTHS ENDED 9/30/06 Revenue $18,838,342 10.02% $ 18,838,342 10.02% Gross Profit 1,281,755 9.55% 1,281,755 9.55% SG&A (excluding depreciation and amortization) 761,388 -6.91% 1,132,045 11.04% Operating Profit (loss) 453,647 71.29% 80,967 200.72% Net profit (loss) attributable to common stockholders 105,880 234.63% (441,980) 11.53% Net profit (loss) per common share 0.02 (0.08) Interest and financing expenses 342,077 2.75% 534,886 35.26% THREE MONTHS ENDED 9/30/05 Revenue $17,122,629 $ 17,122,629 Gross Profit 1,169,966 1,169,966 SG&A (excluding depreciation and amortization) 817,887 1,019,493 Operating Profit (loss) 264,846 26,924 Net loss attributable to common stockholders (78,646) (396,272) Net loss per common share (0.01) (0.09) Interest and financing expenses 332,921 395,438
Synergy Brands Synergy Brands is a holding Company that operates through wholly owned segments. In order to fully understand the results of operations, each segment is analyzed respectively. Revenues increased by 10% to $18,838,342 for the three months ended September 30, 2006, as compared to $17,122,629 for the three months ended September 30, 2005. The largest percentage increase was in PHS Group's operation. Selling General and Administrative expenses (SGA) increased by 11% to $1,132,045 for the three months ended September 30, 2006 as compared to $1,019,493 for the three months ended September 30, 2005. The increase of SG&A was marginal as compared to increased sales as well as an increase in corporate regulatory costs on a corporate level. The largest subsidiary of the Company, PHS Group, increased its SGA expenses by 2% to $525,773 for the three months ended September 30, 2006 as compared to $516,347 for the three months ended September 30, 2005. PHS incurs variable expenses in connection with selling costs such as sales commission, drivers, warehousing and administrative personnel as well as its promotional expenses. As revenues rise sales commissions and certain operating expenses resulting from sales increase commensurately. 22 The net loss attributable to Common Stockholders of the Company was $441,980 for the three months ended September 30, 2006 as compared to $396,272 for the three months ended September 30, 2005. Interest and financing costs represents 121% of the total loss. Management believes that its corporate expenses may increase as a result of additional regulatory requirements that have been enacted by the Securities and Exchange Commission (SEC). The Company will be required to comply with additional governance and financial regulations that will likely result in additional corporate expenses. Corporate expenses for the three months ended September 30, 2006 totaled $370,657, which include legal, accounting and regulatory expenses as compared to $201,606 for the three months ended September 30, 2005. Below is a summary of the results of operation by segment: PHS Group: (B2B Operations) Synergy's Grocery operation improved its operation through an expansion of its Metro NY wholesale operation and private label grocery sales. Sales improved by 11% to $18.1 million and operating profit increased by 24% to $592,060 for the three month period ended September 30, 2006 as compared to same such period ended September 30, 2005. PHS represented 95% of the Company's overall revenues and provides the most of the cash flow for the Company's other segments as well as corporate regulatory expenses. PHS plans to continue attempting to build its Metro NY, operations, private label and wholesale distribution of grocery and HBA and increase its international sales to Canada and the Caribbean. B2C operations. (Gran Reserve Corporation supra GRC) B2C operations consist of www.CigarGold.com, www.CigarsAroundtheWorld.com, www.BeautyBuys.com; retail store operation in Miami and online partnership programs such as www.Overstock.com and www.Google.com. The operation has relocated to a 6,000 square foot facility in Miami Lakes Florida, which handles administration, and order flow for the operation. Sales increased by 1% to $528,270 while operating loss decreased by 48% to $49,000. Retail store operations commenced in December of 2005 with a grand opening, which occurred on March 4, 2006. GRC plans to have its retail outlets act as its hubs for expansion in FY 2006-2007. The combination of online sales as well as retail store sales is expected to be the focus for growth in FY 2006-2007. The retail store is an expansion of Bill Rancic's Cigars Around the World (CAW) concept of providing the ultimate destination to a cigar aficionado. The Company has been disappointed by GRC's growth and believes that rapidly changing antismoking legislation may shift the Cigar business to be a complete destination business as opposed to a leisurely activity. Proset operations In the first quarter of 2006, the Company secured direct contacts in Europe for Luxury Goods and secured Costco and other customers for the distribution of these goods. These goods include some of the most respected producers for Bags, wallets, briefcases, and eyewear in Europe. Management expected that Proset-operating results should significantly improve in FY 2006-2007. However, results have been disappointing and below management expectations. However, Proset operating structure has been integrated into PHS Group, thus allowing for logistics to be integrated into PHS operations. The flow of luxury goods has materialized in the first quarter of 2006 and Costco and Amazon has received numerous deliveries. However, repeated cycles and product acceptance has been below management's expectations. 23 Corporate Expenses: The Company's allocation to corporate expenses was increased by 84% to $370,657 for the three months ended September 30, 2006 as compared to the three months ended September 30, 2005. Corporate expenses represent 33% of overall operating expense of the Company. Operating expenses for all operations including corporate expenses totaled $1.1 million in the third quarter of 2006. Below is a detailed review of the Company's performance. In order to fully understand the Company's results a discussion of the Company's segments and their respective results follow; B2B OPERATIONS The Company's B2B operations consist of two operating businesses, PHS Group and Proset. PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States and Canada. PHS is the largest subsidiary of the Company and represents about 95% of the overall company sales. PHS's core sales base remains the distribution of nationally branded consumer products in the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, where as a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply and in turn increase sales to its customers through this unique focus. PHS concentrates on the fastest moving promotional items and uses logistics and distribution savings to streamline and reduce its sale prices. The second business segment within the company's B2B sector is Proset Hair Systems (Proset). Proset imports and distributes salon hair care products and luxury goods to wholesalers and distributors, in the northeastern part of the United States. In the end of the second quarter of 2006 PHS has started to co-pack private label grocery products intended to be distributed and sold to national chains and it's Metro NY operations. 24 PHS SEGMENT INFORMATION OF OPERATING BUSINESSES PHS Group CHANGE THREE MONTHS ENDED 9/30/06 Revenue 18,079,537 10.63% Gross Profit 1,120,563 12.25% SG&A 525,773 1.83% Operating Profit (loss) 592,060 23.61% Net Profit(loss) 266,278 66.79% Interest and financing expenses 324,438 3.22 THREE MONTHS ENDED 9/30/05 Revenue 16,342,845 Gross Profit 998,246 SG&A 516,347 Operating Profit (loss) 478,965 Net Profit(loss) 159,651 Interest and financing expenses 314,324 PHS increased its revenues by 11% to $18.1 million for three months ended September 30, 2006 as compared to $16.3 million for the three months ended September 30, 2005. The increase in PHS business is attributable to the utilization of additional vendors, development of a wholesale operation and expansion of the Canadian distribution business in Ontario, Canada, increase of its Domestic Wholesale business and expansion into the Dominican Republic and continued growth of its grocery private label business. The overall gross profit percentage was 6.2% for the three months ended September 30, 2006. PHS has been able to maintain its sales and customer base while increasing gross profit by 12%. This has been achieved through its wholesale operations by generating incremental retail sales as opposed to lower margin wholesale revenues. Additionally, PHS has taken advantage of promotional rebates, which further enables its cost of goods to be reduced. PHS plans to continue this approach, but it does rely on manufactures promotion to achieve its targeted results. Net profit was $266,278 for the three months ended September 30, 2006 as compared to a profit of $159,651 for the three months ended September 30, 2005. 25 PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES Salon THREE MONTHS ENDED 9/30/06 products CHANGE Revenue 230,535 -10.71% Gross Profit (6,531) -423.96% SG&A 58,006 -23.58% Operating Profit(loss) (89,413) -25.33% Net loss (108,306) -23.20% Interest and financing expenses 17,639 -5.15% THREE MONTHS ENDED SIX 9/30/05 Revenue 258,195 Gross Profit 2,016 SG&A 75,902 Operating Profit(loss) (119,741) Net Profit(loss) (141,029) Interest and financing expenses 18,597 Proset revenues decreased by 11% to $230,535 for the three months ended September 30, 2006 as compared to $258,195 the three months ended September 30, 2005. SG&A decreased by 24% to $58,006 for the three months ended September 30, 2006 as compared to $75,902 for the three months ended September 30, 2005. Net loss improved from a loss of $141,029 for the three months ended September 30, 2005, to a loss of $108,306 for the three months ended September 30, 2006. Proset started to distribute its newly acquired line of salon products from Italy under the NYCE logo at the end of the third quarter of 2006. 26 B2C SEGMENT INFORMATION OF OPERATING BUSINESSES B2C CHANGE THREE MONTHS ENDED 9/30/06 Revenue 528,270 1.28% Gross Profit 167,723 -1.17% SG&A 177,609 21.29% Operating Profit(loss) (49,000) -48.08% Net loss (52,092) -46.44% THREE MONTHS ENDED 9/30/05 Revenue 521,589 Gross Profit 169,704 SG&A 225,638 Operating Profit(loss) (94,378) Net Profit(loss) (97,268) The Company's B2C activities are conducted through its wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses o Cigars Around the World sells premium cigars to restaurants, hotels, casinos, country clubs and many other leisure related destinations. The company was acquired in June 2003. (www.cigarsaroundtheworld.com) o CigarGold.com sells premium cigars through the Internet directly to the consumer. (www.cigargold.com) o GRC opened its first retail store in Miami, Florida in March, 2006. The store is expected to be an extension to CAW operation and the store is called Cigars Around the World. o BeautyBuys.com sells salon hair care products directly to the consumer via the Internet. (www.beautybuys.com) o The Company's B2C websites also expects to generate revenue through affiliates and partnership agreements such as www.overstock.com, www.google.com and paid links. Cigars Around the World (CAW), a wholly owned subsidiary of Synergy Brands, Inc., officially opened its first retail outlet and cigar club in Miami Lakes Florida, on March 4, 2006. The 6,000 square-foot facility, located at 15804 57th Ave, in Miami Lakes features more than 1,000 unique cigars that include brand name, hand made premium cigars as well as Gran Reserve Corp's (GRC) proprietary brands as well as Cigar Accessories. The entire facility is temperature and humidity controlled so all the Cigars can be viewed in a total store experience. In addition, the store houses a Cigar Lounge with Free satellite TV and Free Wireless Internet which will enhance the customer's Cigar smoking and shopping experience. CAW expects to use its facility for Radio remotes for special events, seminars on upcoming news in the Cigar world, and other organized events for its members. CAW features the top selling Cigar brands which include Macanudo, Partagas, Montecristo, Cohiba, Arturo Fuentes-Opus X, Hemingway, Padron, Punch, Romeo y' Julietta, Suarez Gran Reserve, Davidoff, Ashton, Mike Ditka and Breton labels among others. The store will also offer premium brands of upscale accessories. All the products in the store are available nationally on the Store's website www.CigarsAroundTheWorld.com. 27 Revenues in the Company's B2C operation for the three months ended September 30, 2006 increased by 1% to $528,070 as compared to $521,589 for the three months ended September 30, 2005. CAW on a current operating basis represents approximately 61% of B2C revenues for the three months ended September 30, 2006. Gross profit for the three months ended September 30, 2006 decreased by 1% to $167,723 as compared to $169,704 for the three months ended September 30, 2005. 28 LIQUIDITY AND CAPITAL RESOURCES September 30, 2006 2005 Working Capital $ 4,239,281 $ 4,872,833 Assets 22,780,204 17,705,599 Liabilities 15,863,401 9,777,171 Equity 6,916,803 7,928,428 Line of Credit Facility 5,929,341 5,191,534 Receivable turnover (days) 58 38 Inventory Turnover (days) 14 17 Net cash used in operating activies (2,645,266) (4,068,375) Net cash provided by investing activites 358,588 100,234 Net cash provided by financing activites 4,024,452 3,855,037 Liquidity for the Company predominately involves the need to finance accounts receivables, inventory, financing costs and operating expenses. The cash flow realized from the Company's gross profit was sufficient to cover the Company's operating expenses. However, the Company relies on debt and equity financing in order to support its receivables and inventory. As a result financing costs are incurred. The Company was not able to support its financing costs solely from operations and relied on equity and debt financing to bridge the gap. The Company generated a net loss attributable to Common Shareholders of approximately $1,317,000. Financing costs totaled $1,360,000. Reductions in financing expenses through equity conversions or debt repayments through operating or capital transactions would be beneficial to the Company's performance. Although the Company improved its cash flow from operating activities by $1.4 million, it needed to secure funds from financing activities to cover its financing expenses. The Company financed its operating activities by issuing $1.75 million in 10% notes in the first quarter of 2006. The Company's working capital decreased by $630,000 to $4.2 million due to a combination of several factors including amortization of debt, increase in financing costs, and a shift from long term to short term debt maturities. Receivables including trade and other receivables increased by $3.0 million due to revenue increases and vendor rebates. The Company acquired sufficient capital to cover its operating expenses and had unused availability of $170,000 under its line of credit. In July 2006 the Company increased its line of credit allowing for the borrowings of up to $6,000,000. The Company believes that it has sufficient availability under its line of credit and an ability to raise sufficient capital to cover its operating losses. However, the goal of the Company is to generate positive cash flow from operations. The capital resources available to the Company consist of $7.0 million in lines of Credit and $5.2 million in long-term notes. The Company's objective is to reduce its notes through the issuance of equity and cash flow as well as refinancing its current obligations with lower rates. However there is no assurance that the Company would be able to achieve its objectives. Achieving these goals and objectives is material to the Company's success. 29 The Company's liquidity relies on the turnover of it inventory and accounts receivables. The Company turns its receivable on average approximately every 58 days and the Company turns its overall inventory on average approximately every 14 days. The Company believes that its collection procedures and procurement policies are consistent with industry standards. However, nearly 57% of the Company's assets consist of trade receivables and inventory. Management believes the Company must maintain a strict policy on insuring collections of receivables and adequate procurement based upon customer demands. Management believes that continued cost containment, improved financial and operating controls, debt reduction, and a focused sales and marketing effort should provide sufficient cash flow from operations in the near term and the Company is working toward reliance on such financial sources and attributes to cover its cash flow requirements but achievement of these goals, however, will likely continue to be dependent upon the Company's attainment of increased revenues, improved operating costs, reduced financing cost and trade support levels that are consistent with management's plans. Such operating performance will be subject to financial, economic and other factors beyond its control, and there can be no assurance that the Company's goals will be achieved. In the interim while such goals are being pursued achievement of positiv' cash flow has been reliant on equity and debt financing, including the Company's exchange of notes payable for common shares and its issuance of further common and preferred stock in private placements and the Company is hopeful that the market will continue to recognize the Company's progress so that such financing method may continue to be available in the future. Expected interest payments on notes payable for the period ended September 30, are as follows: 09/30/07 09/30/08 09/30/09 09/30/10 09/30/11 Total $294,000 $124,000 $88,000 $88,000 $8,000 $602,000 Variable interest rate on notes of $916,667 was 11.25%. Variable interest rate on note of $900,000 was 8.25%. Principle repayments on notes payable for the period ended September 30, are as follows: 09/30/07 09/30/08 09/30/09 09/30/10 09/30/11 Total $4,024,000 $550.000 $384,000 $384,000 $1,071,000 $6,413,000 CRITICAL ACCOUNTING POLICIES. The discussion and analysis of the Company's financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. On an on going basis, management evaluates its estimates. Management uses authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. Management believes that the following critical accounting policies affect its more significant judgments and estimates in the preparation of the Company's financial statements. ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company's accounts receivable are due from businesses engaged in the distribution of grocery, health and beauty products as well as from consumers who purchase health and beauty products and premium handmade cigars from the Company's Web sites. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral may be required. Accounts receivable are due within 10 - 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. Estimates are used in determining the allowance for doubtful accounts based on the Company's historical collections experience, current trends, credit policy and a percentage of its accounts receivable by aging category. In determining these percentages, the Company looks at historical write-offs of its receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from its customers. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. VALUATION OF DEFERRED TAX ASSETS. Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets are primarily comprised of reserves, which have been deducted for financial statement purposes, but have not been deducted for income tax purposes as well as net operating loss carry forwards. The Company annually reviews the deferred tax asset accounts to determine if is appears more likely than not that the deferred tax assets will be fully realized. At September 30, 2006, the Company has established a full valuation allowance. 30 VALUATION OF LONG-LIVED ASSETS. The Company reviews its long-lived assets periodically to determine potential impairment by comparing the carrying value of the assets with expected net cash flows expected to be provided by the operating activities of the business or related products. Should the sum of the expected future net cash flows be less than the carrying value, the Company would determine whether an impairment loss should be recognized. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the Asset. Long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. To the extent impairment has occurred, the carrying amount of the asset would be written down to an amount to reflect the fair value of the asset. SEASONALITY Sales by PHS Group and Proset usually peak at the end of the calendar quarter, when the Company's suppliers offer promotions which lower prices and, in turn, the Company is able to lower its prices and increase sales volume. Suppliers tend to promote at quarter end and as a result reduced products costs may increase sales. In particular, the first and second quarters are usually better operating quarters. Sales of beauty care products and fragrances increase over traditional gift giving holidays such as Christmas, Mother's Day, Father's Day, and Valentine's Day. Cigar product sales also increase during holiday periods and summer months as well as around special sporting events. INFLATION The Company believes that inflation, under certain circumstances, could be beneficial to the Company's major business, PHS Group. When inflationary pressures drive product costs up, the Company's customers sometimes purchase greater quantities of product to expand their inventories to protect against further pricing increases. This enables the Company to sell greater quantities of products that are sensitive to inflationary pressures. However, inflationary pressures frequently increase interest rates. Since the Company is dependent on financing, any increase in interest rates will increase the Company's credit costs, thereby reducing its profits. However, inflation increases prices which maybe a natural hedge to an increase in interest in the Company's consumer business. However, in certain times rising prices may cause a decline in sales that would result in reduced operating profit. 31 Item 4-Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our disclosure controls and procedures as of and have found such to be effective as of the end of the period covered by this report. Under rules promulgated by the SEC, disclosure controls and procedures are defined as those controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Based on the evaluation of our disclosure controls and procedures, management determined that such controls and procedures were effective in timely alerting them to material information relating to the Company (including its Consolidated Subsidiaries) required to be included in the Company's periodic reports. Further, there were no significant changes in the internal controls or in other factors that could significantly affect these controls after September 30, 2006, the date of the conclusion of the evaluation of disclosure controls and procedures. The Company's management, including its principal executive officer and the principal financial officer, does not expect that the Company's disclosure controls and procedures and its internal control processes will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. The Company monitors its disclosure controls and procedures and internal controls and makes modifications as necessary; the Company's intent in this regard is that the disclosure controls and procedures and the internal controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. 32 ITEM 1A: RISK FACTORS FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS Other than the factual matters set forth herein, the matters and items set forth in this report are forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. These statements relate to future events or the Company's future financial performance and include, but are not limited to, statements concerning: The anticipated benefits and risks of the Company's key strategic partnerships, business relationships and acquisitions; The Company's ability to attract and retain customers; The anticipated benefits and risks associated with the Company's business strategy, including those relating to its distribution and fulfillment strategy and its current and future product and service offerings; The Company's future operating results, its need for and availability of financing to sustain its operations and expand thereon; and the future value of its common stock; The anticipated size or and trends in the market segments in which the Company competes and the anticipated competition in those markets; Potential government regulation; and The Company's future capital requirements and its ability to satisfy its capital needs. Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Factors that could cause such differences include, but are not limited to, those identified herein and other risks included from time to time in the Company's other Securities and Exchange Commission ("SEC") reports and press releases, copies of which are available from the Company upon request. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements and continued availability of logistics and financial support therefore. Moreover the Company assumes no responsibility for the accuracy and completeness of the forward-looking statements to conform such statements to actual results or to changes in its expectations. In addition to the other information in this Form 10-Q, the following risk factors should be carefully considered in evaluating the Company business because these factors may have a significant impact on the Company's business, operating results and financial condition. As a result of the risk factors discussed below and elsewhere in this Form 10-Q and the risks discussed in the Company's other SEC filings, actual results could differ materially from those projected in any forward-looking statements. 33 1. THE COMPANY HAS INCURRED OPERATING LOSSES, HAS MATERIAL DEBT, AND HAS BEEN AND IS RELIANT UPON FINANCING. The Company has a long history of operating losses. To date, a large portion of the Company's expenses have been financed through capital raising activities. Although the Company has narrowed its losses, it still continues to report operating deficits as opposed to profits. A large portion of the Company's historical losses is a direct result of fees and expenses associated with stock and/or other working capital financing. The Company believes that Financing costs must be reduced in order to improve operating results. Failure to reduce financing costs will likely inhibit the Company's growth. There is no assurance that further financing will not be needed for operating purposes, and where needed there can be no assurances of continued availability of financing at affordable levels of expense. THE COMPANY HAS SIGNIFICANT INDEBTEDNESS As of September 30, 2006 the Company had long-term indebtedness of $ 2,067,007. Although the Company made debt principal reduction payments over the last two years, it may incur substantial additional debt in the future, and in any event a significant portion of the Company's future cash flow from operating activities is likely to remain dedicated to the payment of interest and the repayment of principal on its indebtedness. The Company's indebtedness could limit its ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or other purposes in the future, as needed; to plan for, or react to, changes in technology and in its business and competition; and to react in the event of an economic downturn. There is no guarantee that the Company will be able to meet its debt service obligations. If the Company is unable to generate sufficient cash flow or obtain funds for required payments, or it we fail to comply with covenants in its indebtedness, the Company will be in default. In addition, the Company may not be able to refinance its indebtedness on terms acceptable to the Company, or at all. Due to the Company's limited operating history, its evolving business model, and the unpredictability of its industries, the Company may not be able to accurately forecast its rate of growth. The Company bases its current and future expense levels and its investment plans on estimates of future net sales and rate of growth. Its expenses and investments are to a large extent fixed, and the Company may not be able to adjust its spending quickly enough if its net sales fall short of its expectations. The Company's revenue and operating profit growth depends on the continued growth of demand for the products offered by the Company or its sellers, and its business is affected by general economic and business conditions throughout the world. A softening of demand, whether caused by changes in consumer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth. Terrorist attacks and armed hostilities create economic and consumer uncertainty that could adversely affect its revenue or growth. Such events could create delays in, and increase the cost of, product shipments, which may decrease demand. Revenue growth may not be sustainable and its company-wide percentage growth rate may decrease in the future. The Company's net sales and operating results will also fluctuate for many other reasons, including: - its ability to expand its network of purchasers and suppliers, and to enter into, maintain, renew, and amend on favorable terms its commercial agreements and strategic alliances; - its ability to acquire merchandise, manage inventory, and fulfill orders; - the introduction by the Company's current or future competitors of websites, products, services, price decreases, or improvements; - changes in usage of the Internet and e-commerce, including in non-U.S. markets; - timing, effectiveness, and costs of upgrades and developments in the Company's systems and infrastructure; - the effects of commercial agreements and strategic alliances and the Company's ability to successfully implement the underlying relationships and integrate them into its business; 34 - the effects of acquisitions, and other business combinations and the Company's ability to successfully integrate them into its business; 34 - the success of the Company's geographic and product line expansions; - technical difficulties, system downtime, or interruptions; - variations in the mix of products and services the Company sells; - variations in the Company's level of merchandise and vendor returns; - disruptions in service by shipping carriers; - the extent to which the Company offers free shipping, continues to reduce product prices worldwide, and provides additional benefits to its customers, which reduce its gross or operating profits; - the extent the Company invests in technology and content, fulfillment, marketing and other expense categories; - the extent to which the Company provides for and pays taxes; and - an increase in the prices of fuel and gasoline, which are used in the transportation of packages, as well as an increase in the prices of other energy products, primarily natural gas and electricity, and commodities like paper and packing supplies, all of which are used in the Company's operating facilities. 2. DEPENDENCE ON PUBLIC TRENDS. The Company's business is subject to the effects of changing customer preferences and the economy, both of which are difficult to predict and over which the Company has no control. A change in either consumer preferences or a downturn in the economy may affect the Company's business prospects. 3. POTENTIAL PRODUCT LIABILITY. As a participant in the distribution chain between the manufacturer and consumer, the Company would likely be named as a defendant in any product liability action brought by a consumer. To date, no claims have been asserted against the Company for product liability; there can be no assurance, however, that such claims will not arise in the future. Currently, the Company does carry product liability insurance. In the event that any products liability claim is not fully funded by insurance, and if the Company is unable to recover damages from the manufacturer or supplier of the product that caused such injury, the Company may be required to pay some or all of such claims from its own funds. Any such payment could have a material adverse impact on the Company. 4. RELIANCE ON COMMON CARRIERS. Although the Company has in the last few years leased a fleet of trucks operated by the Company to make deliveries, the Company is still dependent, for shipping of product purchased, on common carriers in the trucking industry. Although the Company uses several hundred common carriers, the trucking industry is subject to strikes from time to time, which could have material adverse effect on the Company's operations if alternative modes of shipping are not then available. Additionally the trucking industry is susceptible to various natural disasters, which can close transportation lanes in any given region of the country. To the extent common carriers are prevented from or delayed in utilizing local transportation lanes or otherwise trucking services are curtailed because of any other case, the Company will likely incur higher freight costs due to the limited availability of trucks during any such period that transportation lanes are restricted. 5. COMPETITION. The Company is subject to competition in all of its various product sale businesses. While these industries may be highly fragmented, with no one distributor dominating the industry, the Company is subject to competitive pressures from other distributors based on price and service and product quality and origin. 35 The food industry is sensitive to a number of economic conditions such as: (i) food price deflation or inflation, (ii) softness in local and national economies, (iii) increases in commodity prices, (iv) the availability of favorable credit and trade terms, and (v) other economic conditions that may affect consumer buying habits. Any one or more of these economic conditions can affect the demand for products PHS distributes to its customers. The industries in which PHS competes in are extremely competitive. Both the wholesale grocery operation and supply chain services to businesses are subject to competitive practices that may affect: (i) the prices at which PHS is able to sell products to its service area, (ii) sales volume, (iii) the ability of our traditional food distribution customers to sell products PHS supplies, which may affect future orders, and (iv) ability to attract and retain customers. In addition, the nature and extent of consolidation in the food and traditional food distribution industries could affect the competitive position. PHS competes with larger distributors and retailers that have greater resources then the Company. The U.S. Market for e-commerce services is extremely competitive. The Company expects competition to intensify as current competitors expand their product offerings and enter the e-commerce market, and new competitors enter the market. The principal competitive factors are the quality and breadth of services provided, potential for successful transaction activity and price. E-commerce markets are characterized by rapidly changing technologies and frequent new product and service introductions. The Company may fail to update or introduce new market pricing formats, selling techniques and/or other mechanics and administrative tools and formats for internet sales consistent with current technology on a timely basis or at all. If its fails to introduce new service offerings or to improve its existing service offerings in response to industry developments, or if its prices are not competitive, the Company could lose customers, which could lead to a loss of revenues. Because there are relatively low barriers to entry in the e-commerce market, competition from other established and emerging companies may develop in the future. Many of the Company's competitors may also have well-established relationships with the Company's existing and prospective customers. Increased competition is likely to result in fee reductions, reduced margins, longer sales cycles for the Company's services and a decrease or loss of its market share, any of which could harm its business, operating results or financial condition. Many of the Company's competitors have, and new potential competitors may have, more experience developing Internet-based software applications and integrated purchasing solutions, larger technical staffs, larger customer bases, more established distribution channels, greater brand recognition and greater financial, marketing and other resources than the Company has. In addition, competitors may be able to develop products and services that are superior to those of the Company or that achieve greater customer acceptance. There can be no assurance that the e-commerce solutions offered by the Company's competitors now or in the future would not be perceived as superior to those of the Company by either businesses or consumers. 6. LITIGATION The Company is subject to legal proceedings and claims, which arise, in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions should not materially affect the financial position, results of operations or cash flows of the Company, but there can be no assurance as to this. 36 7. POSSIBLE LOSS OF NASDAQ SMALL CAP LISTING. Synergy's qualification for trading on the NASDAQ Small Cap system has in the past been questioned, the focus being on the market quotes for the Company's stock, the current bid price having for a time in the past been reduced below the minimum NASDAQ standard of $1 and had been below such level for an appreciable period of time, as well as the Company also being notified in the past that stockholders' equity had fallen below minimum NASDAQ continued listing standard of $2,500,000. NASDAQ has established, and the Commission has approved, certain maintenance requirements to which the Company must adhere to remain listed, including the requirement that a stock listed in such market have a bid price greater than or equal to $1.00 and the listed Company maintain stockholders equity above $2,500,000. The bid price per share for the Common Stock of Synergy had been below $1.00 in the past and the Common Stock has remained on the NASDAQ Small Cap System because Synergy had complied with alternative criteria, which are now eliminated under the new rules. If the bid price dips below $1.00 per share, and is not brought above such level for a sustained period of time or the Company fails to maintain stockholders' equity at a level of at least $2,500,000 the Common Stock could be delisting from the NASDAQ Small Cap System and thereafter trading would likely be reported in the NASDAQ's OTC Bulletin Board or in the "pink sheets." In the event of delisting from the NASDAQ Small Cap System, the Common Stock would become subject to the rules adopted by the Commission regulating broker-dealer practices in connection with transactions in "penny stocks", including what the Company believes to be stringent disclosure rules very different from NASDAQ trading practice procedures. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Common Stock became subject to the penny stock rules, many broker-dealers might be unwilling to engage in transactions in the Company's securities because of the added disclosure requirements, thereby making it more difficult for purchasers of the Common Stock to dispose of their shares. The Company's common stock has historically remained at NASDAQ trading levels above $1 except for limited periods of time and the Company has achieved and is confident of maintaining a level of Stockholders' equity above $2,500,000. Historical stability combined with the Company's increasing business share in the market and its continuing establishment as a viable force in the industries wherein it participates gives the Company confidence that its susceptibility to market deficiencies is in a much lessened state then in years past and that it can continue to achieve and maintain NASDAQ listing compliance, but of this there can be no assurance. 8. RISKS OF BUSINESS DEVELOPMENT-INTERNET MARKETING -THE COMPANY DEPENDS ON CONTINUED USE OF THE INTERNET AND GROWTH OF THE ONLINE PRODUCT PURCHASE MARKET. Because still the lines of product and product distribution established for the Company regarding its e-commerce marketing are relatively new and different from its historical non-internet product distribution business, the Company's operations in these areas should continue to be considered subject to all of the risks inherent in a new business enterprise, including the absence of an appreciable operating history and the expense of new product development and uncertainties on demand and logistics of delivery and other satisfaction of customer demands. Various problems, expenses, complications and delays may be encountered in connection with the development of the Company's new products and methods of product distribution. These expenses must either be paid out of the proceeds of future equity offerings or out of generated revenues and Company profits and will likely be a drain on Company capital if revenues and revenue collection do not keep pace with Company expenses. There can be no assurance as to the continued availability of funds from revenues or from any other sources. The Company's future potential revenues and profits substantially depend to a great extent upon the widespread acceptance and use of the Internet as an effective medium of business and communication by the Company's target customers. Rapid growth in the use of and interest in the Internet has occurred. As a result, acceptance and use continue to develop, and a sufficiently broad base of consumers have adopted, and continue to use, the Internet and other online services as a medium of commerce but there can be no assurance of continued use at the levels anticipated by the Company to sustain its internet business segments. In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements, ease of use restrictions, and/or potential customer continued preferences for more traditional see and touch purchasing. The Company's success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware and education regarding and ease of use thereof as necessary for reliable Internet access and services and hopeful continued shifting of potential customers shopping preferences to the internet. 37 As the Internet and online commerce industry evolve, the Company must license leading technologies useful in its business, enhance its existing services, develop new services and technology that address the increasingly sophisticated and varied needs of its prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The Company may not be able to successfully implement new technologies or adapt its proprietary technology and transaction processing systems to customer requirements or emerging industry standards. If the Company is unable to do so, it could adversely impact its ability to build on its varied businesses and attract and retain customers. The Company's future revenues and profits depend to a large extent upon the widespread acceptance and use of the Internet and other online services as a medium for commerce by merchants and consumers. The use of the Internet and e-commerce may not continue to develop at past rates and a sufficiently broad base of business and individual customers may not adopt or continue to use the Internet as a medium of commerce. The market for the sale of goods and services over the Internet is a relatively new and emerging market. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty. Growth in the Company's customer base depends on obtaining businesses and consumers who have historically used traditional means of commerce to purchase goods. For the Company to be successful, the Company believes that these market participants must accept and the Internet provides use the novel ways of conducting business and the Internet provides exchanging information as. E-commerce may not prove to be a viable medium for purchasing for the following reasons, any of which could seriously harm the Company's business: - The necessary infrastructure for Internet communications may not develop adequately; - The Company's potential customers, buyers and suppliers may have security and confidentiality concerns; - Complementary products, such as high-speed modems and high-speed communication lines, may not be developed or be adequately available; - Alternative-purchasing solutions may be implemented; - Buyers may dislike the reduction in the human contact and product review attendant to Internet sales, different from that inherent in traditional purchasing methods; - Use of the Internet and other online services may not continue to increase or may increase more slowly than expected; - The development or adoption of new technology standards and protocols may be delayed or may not occur; and - New and burdensome governmental regulations may be imposed. 38 The Internet is still relatively new and rapidly changing technology and continues to experience significant growth in the number of users, frequency of use and bandwidth requirements. There can be no assurance that the infrastructure of the Internet and other online services will be able to support the demands placed upon them and/or that the Company may be able to keep pace therewith. Furthermore, the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and could face such outages and delays in the future. These outages and delays could adversely affect the level of Internet usage and also the level of traffic and the processing of transactions. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet or other online service activity, or due to increased governmental regulation. Changes in or insufficient availability of telecommunications services or other Internet service providers to support the Internet or other online services also could result in slower response times and adversely affect usage of the Internet and other online services generally and the Company's service in particular. If use of the Internet and other online services does not continue to grow or grows more slowly than expected, if the infrastructure of the Internet and other online services does not effectively support growth that may occur, or if the Internet and other online services do not become or sustain as a viable commercial marketplace, the Company will have to adapt its business model to any resulting new environment, which would materially adversely affect its results of operations and financial condition. 9. RAPIDLY CHANGING MARKET MAY IMPACT OPERATIONS. The market for the Company's products is rapidly changing with evolving industry standards and frequent new product introductions. The Company's future success will depend in part upon its continued ability to enhance its existing products and to introduce new products and features to meet changing customer requirements and emerging industry standards and to continue to have access to such products from their sources on a pricing schedule conducive to the Company operating at a profit. The Company will have to continuously develop, change and implement as and where necessary an appropriate marketing strategy for its various products. There can be no assurance that the Company will successfully complete the development of future products or that the Company's current or future products will achieve market acceptance levels and be made available for sale by the Company conducive to the Company's fiscal needs. Any delay or failure of these products to achieve market acceptance or limits on their availability for sale by the Company would adversely affect the Company's business. In addition, there can be no assurance that the products or technologies developed by others will not render the Company's products or technologies non-competitive or obsolete. Management believes actions taken and presently being taken to meet and enhance the Company's operating and financial requirements should assure and provide the opportunity for the Company to continue as a going concern. However, Management cannot predict the outcome of future operations and no adjustments have been made to offset the outcome of this uncertainty. 39 10. EXTENSIVE AND INCREASING REGULATIONS OF TOBACCO PRODUCTS AND LITIGATION MAY IMPACT CIGAR INDUSTRY. The tobacco industry in general has been subject to extensive regulation at the federal, state and local levels. Recent trends have increased regulation of the tobacco industry. Although regulation initially focused on cigarette manufacturers, it has begun to have a broader impact on the industry as a whole and may focus more directly on cigars in the future. The increase in popularity of cigars may likely lead to an increase in regulation of cigars. A variety of bills relating to tobacco issues have been introduced in the U.S. Congress, including bills that would (i) prohibit the advertising and promotion of all tobacco products or restrict or eliminate the deductibility of such advertising expense, (ii) increase labeling requirements on tobacco products to include, among others things, addiction warnings and lists of additives and toxins, (iii) shift control of tobacco products and advertisements from the Federal Trade Commission (the "FTC") to the Food and Drug Administration (the "FDA"), (iv) increase tobacco excise taxes and (v) require tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases. There has also been recent cooperation between federal and State authorities to curtail Internet sales of tobacco products because of tax issues as well as underage purchase questions. Future enactment of such proposals or similar bills may have an adverse effect on the results of operations or financial condition of the Company. Although, except for warning labeling and smoke free facilities, current legislation and regulation focuses on cigarette smoking and sales, there is no assurance that the scope of legislation will not be expanded in the future to encompass cigars as well. A majority of states restrict or prohibit smoking in certain public places and restrict the sale of tobacco products to minors. Local legislative and regulatory bodies also have increasingly moved to curtail smoking by prohibiting smoking in certain buildings or areas or by designating "smoking" areas. These restrictions generally do not distinguish between cigarettes and cigars. These restrictions and future restrictions of a similar nature have and likely will continue to have an adverse effect on the Company's sales or operations because of resulting difficulty placed upon advertising and sale of tobacco products, such as restrictions and in many cases prohibition of counter access to or display of premium handmade cigars, and/or decisions by retailers not to advertise for sale and in many cases to sell tobacco products because of public pressure to stop the selling of tobacco products. Numerous proposals also have been and are being considered at the state and local levels, in addition to federal regulations, to restrict smoking in certain public areas, regulating point of sale placement and promotions of tobacco products and requiring warning labels. Increased cigar consumption and the publicity such increase has received may increase the risk of additional regulation. The Company cannot predict the ultimate content, timing or effect of any additional regulation of tobacco products by any federal, state, local or regulatory body, and there can be no assurance that any such legislation or regulation would not have a material adverse effect on the Company's business. In addition numerous tobacco litigation has been commenced and may in the future be instituted, all of which may adversely affect (albeit focusing primarily on cigarette smoking) cigar consumption and sale and may pressure applicable government entities to institute further and stricter legislation to restrict and possibly prohibit cigar sale and consumption, any and all of which may have an adverse affect on Company business. 11. NO DIVIDENDS LIKELY. No dividends have been paid on the Common Stock since inception, nor, by reason of its current financial status and its contemplated financial requirements, does Synergy contemplate or anticipate paying any dividends upon its Common Stock in the foreseeable future but the Company does have outstanding preferred stock upon which dividends are paid current. 40 12. POTENTIAL LIABILITY FOR CONTENT ON THE COMPANY'S WEB SITE. Because the Company posts product information and other content on its Web sites, the Company faces potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that the Company posts. Such claims have been brought, and sometimes successfully pressed, against other Internet content distributors. In addition, unauthorized personnel could expose the Company to liability with respect to the unauthorized duplication of content or unauthorized use of other parties' proprietary technology or infiltration into the Company's system. The Company is not aware of any present claim of such nature or any current basis therefore but because of the nature of the product marketing techniques utilized by the Company with application of the Internet, likelihood of claims of such nature arising in the future cannot be predicted. 13. THE COMPANY'S NET SALES WOULD BE HARMED IF IT EXPERIENCES SIGNIFICANT CREDIT CARD FRAUD. A failure to adequately control fraudulent credit card transactions would harm the Company's net sales and results of operations because it does not carry insurance against such risk. Under current credit card practices, the Company may be held liable for fraudulent credit card transactions where it does not obtain a cardholder's signature, a frequent practice in Internet sales. 14. POTENTIAL FUTURE SALES OF COMPANY STOCK. The majority of the shares of common stock of the Company outstanding are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act of 1933. In general under Rule 144 a person (or persons whose shares are aggregated) who has satisfied a one year holding period may, under certain circumstances, sell within any three month period a number of shares which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of shares by a person who is not an affiliate of the Company and who has satisfied a two-year holding period without, any quantity limitation. The majority of holders of the shares of the outstanding common stock of the Company deemed "restricted securities" have already satisfied at least their one year holding period or will do so with the next fiscal year, and such stock is either presently or within the next fiscal year will become eligible for sale in the public market (subject to volume limitations of Rule 144 when applicable). The Company is unable to predict the effect that sales of its common stock under Rule 144, or otherwise, may have on the then prevailing market price of the common stock. However, the Company believes that the sales of such stock under Rule 144 may have a depressive effect upon the market. 15. THE COMPANY MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS. The success of the Company's business model depends in large part on its continued ability to maintain and re sell to current customers and to increase its number of customers in the future. The market for its businesses may grow more slowly than anticipated because of or become saturated with competitors, many of which may offer lower prices or broader distribution. The Company is also highly dependant on Internet sales, which require interest of potential suppliers in the Internet mode of product purchasing. Some potential suppliers may not want to join the Company's networks because they are concerned about the possibility of their products being listed together with their competitors' products thus limiting availability of product mix made available by the Company. If the Company cannot continue to bring new customers to its Internet sites or maintain its existing customer base or attract listing of a mixture of product, the Company may be unable to offer the benefits of the network model at levels sufficient to attract and retain customers and sustain that aspect of its business. 41 16. THE COMPANY'S BUSINESS MAY SUFFER IF IT IS NOT ABLE TO PROTECT IMPORTANT INTELLECTUAL PROPERTY. The Company's ability to compete effectively against other companies in its industry will depend, in part, on its ability to protect its proprietary technology and systems designs relating to its technologies. The Company does not know whether it has been or will be completely successful in doing so. Further, its competitors may independently develop or patent technologies that are substantially equivalent or superior to those of the Company so as to effectively compete. 17. THE COMPANY MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF ITS PROPRIETARY KNOWLEDGE. The Company relies, in part, on contractual provisions to protect its trade secrets and proprietary knowledge. These agreements may be breached, and the Company may not have adequate remedies for any breach. Its trade secrets may also be known without breach of such agreements or may be independently discovered by competitors. Its inability to maintain the proprietary nature of its technology could harm its business, results of operations and financial condition by adversely affecting its ability to compete. 18. OTHERS MAY ASSERT THAT THE COMPANY'S TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY RIGHTS. The Company believes that its technology does not infringe the proprietary rights of others. However, the e-commerce industry is characterized by the existence of a large number of patents and trademarks and frequent claims and litigation based on allegations of patent infringement and violation of other intellectual property rights. As the e-commerce market and the functionality of products in the industry continue to grow and overlap, the Company believes that the possibility of an intellectual property claim against it will increase. For example, the Company may inadvertently infringe an intellectual property right of which it is unaware, or there may be applications to protect intellectual property rights now pending of which it is unaware which it may be infringing when they are issued in the future, or the Company's service or systems may incorporate and/or utilize third party technologies that infringe the intellectual property rights of others. The Company has been and expects to continue to be subject to alleged infringement claims. The defense of any claims of infringement made against the Company by third parties, whether or not meritorious, could involve significant legal costs and require the Company's management to divert time and attention from its business operations. Either of these consequences of an infringement claim could have a material adverse effect on the Company's operating results. If the Company is unsuccessful in defending any claims of infringement, it may be forced to obtain licenses or to pay royalties to continue to use its technology. The Company may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If the Company fails to obtain necessary licenses or other rights, or if these licenses are costly, its operating results may suffer either from reductions in revenues through the Company's inability to serve customers or from increases in costs to license third-party technologies. 19. THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO CONTINUE TO LICENSE SOFTWARE THAT IS NECESSARY FOR ITS SERVICE OFFERING. Through distributors, the Company licenses a variety of commercially available Internet technologies, which are used in its services and systems to perform key functions. As a result, the Company is to a certain extent dependent upon continuing to maintain these technologies. There can be no assurance that the Company would be able to replace the functionality provided by much of its purchased Internet technologies on commercially reasonable terms or at all. The absence of or any significant delay in the replacement of that functionality could have a material adverse effect on the Company's business, financial condition and results of operations. 42 20. THE COMPANY'S SYSTEMS INFRASTRUCTURE MAY NOT KEEP PACE WITH THE DEMANDS OF ITS CUSTOMERS. Interruptions of service as a result of a high volume of traffic and/or transactions could diminish the attractiveness of the Company's services and its ability to attract and retain customers. There can be no assurance that the Company will be able to accurately project the rate or timing of increases, if any, in the use of its service, or that it will be able to expand and upgrade its systems and infrastructure to accommodate such increases in a timely manner. The Company currently maintains systems in the U.S. Any failure to expand or upgrade its systems could have a material adverse effect on its results of operations and financial condition by reducing or interrupting revenue flow and by limiting its ability to attract new customers. Any such failure could also have a material adverse effect on the business of its customers, which could damage the Company's reputation and expose it to a risk of loss or litigation and potential liability. Service offerings involving complex technology often contain errors or performance problems. Many serious defects are frequently found during the period immediately following introduction and initial implementation of new services or enhancements to existing services. Although the Company attempts to resolve all errors that it believes would be considered serious by its customers before implementation, its systems are not error-free. Errors or performance problems could result in lost revenues or cancellation of customer agreements and may expose the Company to litigation and potential liability. In the past, the Company has discovered errors in software used in the Company after its incorporation into Company sites. The Company cannot assure that undetected errors or performance problems in its existing or future services will not be discovered or that known errors considered minor by it will not be considered serious by its customers. The Company has experienced periodic minor system interruptions, which may continue to occur from time to time. The Company's success depends on the efficient and uninterrupted operation of its computer and communications hardware systems. These systems are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. Despite any precautions the Company takes or plans to take, the occurrence of a natural disaster or other unanticipated problems could result in interruptions in its services. In addition, if any hosting service fails to provide the data communications capacity the Company requires, as a result of human error, natural disaster or other operational disruption, interruptions in the Company's services could result. Any damage to or failure of its systems could result in reductions in, or terminations of, its services, which could have a material adverse effect on its business, results of operations and financial condition. 21. THE COMPANY MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT IN DILUTION TO ITS STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIESWHICH COULD IMPAIR ITS FINANCIAL PERFORMANCE. If appropriate opportunities present themselves, the Company may acquire complementary or strategic businesses, technologies, services or products that it believes will be useful in the growth of its business. The Company does not currently have any commitments or agreements with respect to any new acquisitions. They may not be able to identify, negotiate or finance any future acquisition successfully. Even if the Company does succeed in acquiring a business, technology, service or product, the process of integration may produce unforeseen operating difficulties and expenditures and may require significant attention from the Company's management that would otherwise be available for the ongoing development of its business. Moreover the anticipated benefits of any acquisition may not be realized or may depend on the continued service of acquired personnel who could choose to leave. If the Company makes future acquisitions, it may issue shares of stock that dilute other stockholders, incur debt, assume contingent liabilities or create additional expenses related to amortizing intangible assets, any of which might harm its financial results and cause its stock price to decline. Any financing that it might need for future acquisitions may only be available to it on terms that restrict its business or that impose on it costs that reduce its revenue. 43 22. GOVERNMENT REGULATION OF THE INTERNET AND E-COMMERCE IS EVOLVING AND UNFAVORABLE CHANGES COULD HARM THE COMPANY'S BUSINESS The Company is subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet and e-commerce. Such existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access, and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel, and personal privacy apply to the Internet and e-commerce. Unfavorable resolution of these issues may harm the Company's business. Like many Internet-based businesses, the Company operates in an environment of tremendous uncertainty as to potential government regulation. The Internet has rapidly emerged as a commerce medium, and governmental agencies have not yet been able to adapt all existing regulations to the Internet environment. Laws and regulations have been introduced or are under consideration and court decisions have been or may be reached in the U.S. and other countries in which the Company does business that affect the Internet or other online services, covering issues such as pricing, user privacy, freedom of expression, access charges, content and quality of products and services, advertising, intellectual property rights and information security. In addition, it is uncertain how existing laws governing issues such as taxation, property ownership, copyrights and other intellectual property issues, libel, obscenity and personal privacy will be applied to the Internet. The majority of these laws were adopted prior to the introduction of the Internet and, as a result, do not address the unique issues of the Internet. Recent laws that contemplate the Internet, such as the Digital Millennium Copyright Act in the U.S., have not yet been fully interpreted by the courts and their applicability is therefore uncertain. The Digital Millennium Copyright Act provides certain "safe harbors" that limits the risk of copyright infringement liability for service providers such as the Company with respect to infringing activities engaged in by users of the service. In the area of user privacy, several states have legislation and/or have proposed legislation that limits or would limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission also has become increasingly involved in this area. The Company does not sell personal user information regarding its customers. The Company does use aggregated data for analysis regarding the Company network, and does use personal user information in the performance of its services for its customers. Since the Company does not control what its customers do with the personal user information they collect, there can be no assurance that its customers' sites will be considered compliant. As online commerce evolves, the Company expects that federal, state or foreign agencies will continue to adopt regulations covering issues such as pricing, content, user privacy, and quality of products and services. Any future regulation may have a negative impact on the Company's business by restricting its methods of operation or imposing additional costs. Although many of these regulations may not apply to its business directly, the Company anticipates that laws regulating the solicitation, collection or processing of personal information could indirectly affect its business. Internet regulation which has met with the most successful challenges is that which touches upon Free Speech. Title V of the Telecommunications Act of 1996, known as the Communications Decency Act of 1996, prohibits the knowing transmission of any comment, request, suggestion, proposal, image or other communication that is obscene or pornographic to any recipient under the age of 18. The prohibitions scope and the liability associated with a violation are currently unsettled. In addition, although substantial portions of the Communications Decency Act of 1996 have been held to be unconstitutional, the Company cannot be certain that similar legislation will not be enacted and upheld in the future. Subsequent attempts at such legislation such as the Child Online Protection Act passed in 1998 have met with similar and successful constitutional attack. It is possible that such legislation could expose companies involved in online commerce to liability, which could limit the growth of online commerce generally. Legislation like the Communications Decency Act and Child Online Protection Act could reduce the growth in Internet usage and decrease its acceptance as a communications and commerce medium. The worldwide availability of Internet web sites often results in sales of goods to buyers outside the jurisdiction in which the Company or its customers are located, and foreign jurisdictions may claim that the Company or its customers are required to comply with their laws. Foreign regulation of Internet use has not met with the success of constitutional and other judicial scrutiny that US regulation has been limited by. As an Internet Company, it is also unclear which jurisdictions may find that the Company is conducting business therein. Its failure to qualify to do business in a jurisdiction that requires it to do so could subject the Company to fines or penalties and could result in its inability to enforce contracts in that jurisdiction. 44 The Company is not aware of any recent related legislation other than that specifically referenced herein which may affect the manner in which the Company utilizes the internet in its business but there can be no assurance that future government regulation will not be enacted further restricting use of the internet that might adversely affect the Company's business. 23. TAXES MAY BE IMPOSED ON INTERNET COMMERCE. In the U.S., the Company does not collect sales or other similar taxes on goods sold through the Company's Internet websites. The Internet Tax Freedom Act of 1998, (extended through November 2003 and internet access tax prohibitions though November 1, 2007), prohibits the imposition of new or discriminatory taxes on electronic commerce by United States federal and State taxing authorities except for taxes caused by nexus of the Seller of the goods in the State. Sales to customers in such States may be taxable, but to date no such taxes have ever been collected by the Company. The Company is not aware of any further extensions of this legislation but understands that more permanent application of the aforesaid Internet Tax Freedom Act is currently being discussed in the federal legislature and further extension has been recommended by the Advisory Commission on Electronic Commerce established by US Congress to further review application of the statute. Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of States, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court's position regarding sales and use taxes on Internet sales. If any of these initiatives addressed the Supreme Court's constitutional concerns and resulted in a reversal of its current position, the Company could be required to collect sales and use taxes. The imposition by State and local governments of various taxes upon Internet commerce could create administrative burdens for the Company and could decrease its future sales. The status of the prohibition is uncertain and States have attempted to impose sales and use tax, often successfully mainly based upon the nexus of the retailer with the State imposing the tax on customers in that State. A number of proposals have been made at the State and local level that would impose additional taxes on the sale of goods and services through the Internet. Such proposals, if adopted and not in conflict with federal prohibitions, could substantially impair the growth of electronic commerce, and could adversely affect the Company's opportunity to derive financial benefit from such activities. There has been recent activity in attempts to enforce the federal Jenkins Act which historically allowed State taxation of sales of goods made through use of the United States mails and is currently being reviewed toward possibly allowing the States to tax Internet sales. In addition, non-U.S. countries may seek to impose service tax (such as value-added tax) collection obligations on companies that engage in or facilitate Internet commerce. A successful assertion by one or more states or any foreign country that the Company should collect sales or other taxes on the sale of merchandise could impair its revenues and its ability to acquire and retain customers. 24. THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO ONLINE COMMERCE. A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. A compromise or breach of the technology used to protect the Company's customers' and their end-users' transaction data could result from, among other things, advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments. Any such compromise could have a material adverse effect on the Company's reputation and, therefore, on its business, results of operations and financial condition. Furthermore, a party who is able to circumvent the Company's security measures could misappropriate proprietary information or cause interruptions in its operations. The Company may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by such breaches. Concerns over the security of transactions conducted on the Internet and other online services and the privacy of users may also inhibit the growth of the Internet and other online services generally, especially as a means of conducting commercial transactions. The Company currently has practices and procedures in place to protect the confidentiality of its customers' and their end-users' information. However, its security procedures to protect against the risk of inadvertent disclosure or intentional breaches of security might fail to adequately protect information that it's obligated to keep confidential. The Company may not be successful in adopting more effective systems for maintaining confidential information, and its exposure to the risk of disclosure of the confidential information of others may grow with increases in the amount of information it possesses. To the extent that the Company activities involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage its reputation and expose it to a risk of loss or litigation and possible liability. The Company's insurance policies may not be adequate to reimburse it for losses caused by security breaches. 45 25. IF THE COMPANY'S FULFILLMENT CENTERS ARE NOT EFFECTIVELY OPERATED THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED. If the Company does not successfully operate its fulfillment centers such could significantly limit the Company's ability to meet customer's demands, which would likely result in diminished revenues, adversely affecting the Company's business. Because it is difficult to predict sales increases the Company may not manage its facilities in an optimal way which may result in excess inventory, warehousing, fulfillment and distribution capacity having an adverse impact on working capital of the Company, or the lack of sufficiency in such areas causing delays in fulfillment of customer orders adversely affecting customer confidence and loyalty. 26. OUR VENDOR RELATIONSHIPS SUBJECT US TO A NUMBER OF RISKS Although we continue to increase the number of vendors that supply products to us and only two vendors account for 10% or more of our inventory purchases, we have significant vendors that are important to our sourcing. We do not have long-term contracts or arrangements with most of our vendors to guarantee the availability of merchandise, particular payment terms, or the extension of credit limits. If our current vendors were to stop selling merchandise to us on acceptable terms, we may not be able to acquire merchandise from other suppliers in a timely and efficient manner and on acceptable terms. 27. THE COMPANY'S STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE. The stock market, and in particular the market for Internet-related stocks, has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for the Company's common stock to decline, perhaps substantially, including: - actual or anticipated variations in the Company's quarterly operating results and expected future results; - changes in, or failure to meet, financial estimates by securities analysts; - unscheduled system downtime; - additions or departures of key personnel; - announcements of technological innovations or new services by the Company or its competitors; - initiation of or developments in litigation affecting the Company; - conditions or trends in the Internet and online commerce industries; - changes in the market valuations of other Internet, online commerce, or technology companies; - developments in regulation; - announcements by the Company or its competitors of significant acquisitions, strategic partnerships, joint ventures, new product of capital commitments; - unanticipated economic or political events; - sales of the Company's common stock or other securities in the open market; and - other events or factors, including those described in the "Risk Factors", section and others that may be beyond the Company's control. - failure to meet its development plans; - the demand for its common stock; - downward revision in securities analyst's estimates or changes in general market conditions; - technological innovations by competitors or in competing technologies; and - investor perception of the Company's industry or its prospects. The Company's stock pricing has fluctuated significantly in the past and there is no assurance such trend may not continue in the future. 46 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds In March 2006, the Company issued 30,000 shares of common stock to Class B Series A Preferred Stockholders in compliance with the subscription agreements dated February 26, 2003. In July 2006, the Company issued 50,000 shares of common stock to Class B Series A Preferred Stockholders in compliance with the subscription agreements dated July 2, 2003. No additional consideration was provided by the holders of the subject preferred stock and no further proceeds were received by the Company beyond that received when the preferred stock was issued. Item 6- Exhibits and Reports on Form 8-K (1) 31.1 Certification Pursuant to Exchange Act Rule 13a - 14(a) / 15d-14(a) signed by the Chief Executive Officer. 31.2 Certification Pursuant to Exchange Act Rule 13a - 14(a) / 15d-14(a) signed by the Chief Financial Officer. 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer. 32.2 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by Chief Financial Officer. (2) There was no reports filed on 8-K for the relevant period. 47 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Synergy Brands, Inc. /s/ Mair Faibish By-------------------- Mair Faibish Chief Executive Officer Dated: November 14, 2006 /s/ Mitchell Gerstein By------------------------- Mitchell Gerstein Chief Financial Officer Dated: November 14, 2006 48 Exhibit 31.1 Certification Pursuant To Exchange Act Rule 13-a-14(a)/-15d-14(a) I, Mair Faibish, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies and material weaknesses we find in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2006 /s/ Mair Faibish Mair Faibish, Chief Executive Officer 49 Exhibit 31.2 Certification Pursuant To Exchange Act Rule 13-a-14(a)/-15d-14(a) I, Mitchell Gerstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies and material weaknesses we find in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2006 /s/ Mitchell Gerstein Mitchell Gerstein, Chief Financial Officer 50 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of Synergy Brands Inc., (the "Company"), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2006 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2006 /s/ Mair Faibish Mair Faibish, Chief Executive Officer Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Financial Officer of Synergy Brands, Inc. (the "Company"), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2006 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2006 /s/ Mitchell Gerstein Mitchell Gerstein, Chief Financial Officer 51